Group Economics
Daily Insight
Macro & Financial Markets Research Maritza Cabezas & Nick Kounis
Dovish Fed and ECB minutes
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9 October 2015 • FOMC minutes: Fed opted to wait in September on fear global slowdown could push inflation lower • We expect Fed to wait until 2016 before raising interest rates • ECB minutes point to increased downside risks - we see more QE in December FOMC buys time on fears of impact of global slowdown
FOMC projections (September meeting)
The FOMC minutes of the September meeting show that risks in emerging markets, particularly in China, raised concern at the Fed on the effects that these developments would have for the US economy and the inflation outlook. As a result, the Fed left its
%
6 5
policy rate on hold during the September meeting. It seems that if
4
these developments had not taken place a rate hike in September
3
would have been likely.
2 1
Labour market almost there… This meeting took place before the disappointing September job market report. Before these figures, Fed participants
0 2015
2016 GDP
Unemployment
2017 PCE
2018
policy rate
mentioned that the labour market had considerably improved and they thought that it would soon meet one of the criteria for policy normalization. For some, a broader improvement of the
Source: Federal Reserve
labour market, could require a temporary decline in the unemployment rate below its long-run normal level to speed up
ECB meeting minutes: 'broad agreement' on downside risks
inflation to the 2% target.
The account of the September Governing Council meeting, published earlier on Thursday, confirmed the dovish tone seen in
…while inflation concerns appear to have increased
President Draghi's press conference after that meeting. The
Some participants indicated that their confidence that inflation
meeting account records that in the Governing Council's
would gradually return to the 2% target 'had not increased, in large
'assessment of the risks surrounding the inflation outlook, there
part because of the recent global and financial developments'.
was...broad agreement that the risks were tilted to the downside,
They needed further confirmation that the economy would continue
given lower commodity prices, a stronger euro exchange rate and
to expand at a moderate rate and labour market conditions would
a somewhat lower growth outlook'. There were also downside
further improve. Forecasts released in September suggest that the
risks to growth as 'recent developments in emerging market
2% target would only be reached in 2018.
economies could have further adverse effects on global growth via both trade and confidence channels'. There was a need to await
More time to see impact of external headwinds on US data
'greater clarity' on these events, but the Council emphasised its
Participants mentioned some of the implications of a material
'willingness and ability to act'.
slowdown in China and possible spillovers to other economies. For the US economy this would mean weaker trade and a
ECB likely to step up QE in December
further appreciation of the USD. This led some participants to
Our general sense from the account is that members judged that
judge that downside risks had increased for economic growth and
the outlook had deteriorated and risks had increased, but that it
inflation. We think the disappointing September jobs market report
was too early to decide on further action at that point. However,
would only have increased the uncertainty. As such, the Fed will
the situation has not turned for the better since September, while
probably delay the rate hike to 2016 to give it more certainty that
the Fed's delay will put upward pressure on the euro if the ECB
data is improving again and that downside risks from EM are
does not act. Our base scenario is that the ECB will step up its QE
easing. Our view is that the first hike will not come until June
programme in December. We expect it to raise the monthly
2016. We don’t rule out a rate hike in March 2016 if this process
purchase amount by EUR 20bn and signal that it will likely extend
turns out to run relatively quickly.
purchases beyond September 2016.